Are TD bank stocks a good investment?

Track all markets on TradingView

TD bank, or Toronto-Dominion Bank is one of the Big Five banks in Canada. With its subsidiaries, TD provides a diverse range of financial services in both Canada and the United States.

Given its long heritage, a market capitalization of $144.58 billion (US$ 107.166 billion) and status as one of the Big Five, does it immediately follow that TD bank stocks in Canada are worth investing in?

This cannot be answered with a simple and quick yes or no. When it comes to choosing a viable bank stock, your investment decision cannot be based exclusively on its market cap. Remember, taking a more holistic view to evaluate an investment is crucial, since there are other important factors to consider.

So, whether or not to invest in a bank stock (or any stock for that matter) investors, especially beginners, are advised to take a broader view. This is standard practice when you need to make sound investment decisions and avoid losing money or losing out on lucrative investment opportunities.  

In this article, Wealth Professional shows you how to look at a bank stock like Toronto-Dominion and help you decide whether it’s a viable investment.

Introduction to Toronto-Dominion Bank

Toronto-Dominion Bank was established on February 1, 1955, via a merger of two other large banks, Toronto Bank and Dominion Bank. The two banks already had a long history, with the former being established in 1855 and the latter in 1869.  

According to Standard & Poor’s, here are some of the relevant rankings of TD Bank Group as of 2021: 

• largest bank in Canada by total assets and market capitalization
• one of the top 10 banks in North America
• 23rd largest bank in the world

Today, TD Bank and its subsidiaries have a staff of around 95,000 people serving over 27.5 million clients worldwide.

In Canada, TD Bank operates through its TD Canada Trust division and caters to over 11 million customers with its network of more than 1,091 branches.

In North America, the company operates through their subsidiary TD Bank, N.A., an institution created via the merger of TD Banknorth and Commerce Bank. TD Bank serves over 6.5 million customers in the US with a network of 1,200 branches across sixteen states and the District of Columbia.

Indicators to look at in a bank stock

Is TD bank stock a good buy? A good way to know this is to look at the relevant indicators. Here’s what individual investors should check to know if a bank stock is a worthy investment.

• Market Capitalization or Market Cap can be taken as a prime indicator of a company’s investment viability. More than simply the total value of a company’s total shares, this indicator can give a better picture of the company’s size as compared to its industry rivals

market cap = total number of outstanding shares x share price

• Price-to-book (P/B) Value Ratio is a ratio that compares the current market cap of a company to its accounting value. Investors are advised to pick stocks with a low P/B ratio, as this indicates that they can end up paying less for stocks with more book value.

P/B Value Ratio = company’s stock price per share ÷ book value per share

• Price to Earnings (P/E) Ratio is a key measure that shows if a stock’s price is high or low relative to its company’s earnings.

P/E Ratio = current share price ÷ earnings per share (EPS)

• Dividend Payout Ratio (DPR) tells how much a company pays out to investors in dividends, in comparison to the earnings of the stock. The DPR is an important indicator of a company’s sustainability, since it shows how well a company’s earnings can cover dividend payouts.

DPR = annual dividend per share ÷ EPS

• Dividend Yield indicates how much a company pays in dividends yearly, relative to its stock price

dividend yield = annual dividend per share ÷ price per share

Other important indicators

When considering investing in stocks, it’s advisable to look at other indicators particular to their industries. As TD is a bank stock, another metric to look at is its Loan-to-deposit ratio (LDR).

The loan-to-deposit ratio is used to assess a bank’s liquidity. The LDR is the bank’s total loans relative to its total deposits for a certain period and is expressed as a percentage value.

LDR = bank’s total loans ÷ total deposits

A very high loan-to-deposit ratio can mean:

• the bank lacks liquidity to take on any unexpected fund requirements
• the bank does not have enough money to cover bad loans and/or withdrawals
• the bank has low liquidity and could be vulnerable to a bank run

On the other hand, a very low LDR could mean that the bank is not earning as much as it should.

A good loan-to-deposit ratio should be in the range of 80% to 90%. An LDR of 100% means that every dollar deposited is also every dollar loaned out.

How do TD bank stocks perform?

Knowing which metrics to look at, we can look at TD bank stocks and rate it as an investment. All stock markets (including the Toronto stock exchange) and stocks are unstable by nature, so their values can change from trading day to trading day.

As of this writing, this is how TD bank stocks are doing:

Using these key metrics, compare these to the industry standards. TD’s market cap is very much robust as this gives it one of the spots in the Big Five banks of Canada, so no issue there. What about the other indicators? Here are the industry standards for a good bank stock:

More experienced financial professionals like Wall Street analysts will compare these industry averages to TD’s stock performance. Placing it on table for a side-by-side comparison, we can see this:

Compared to industry averages for bank stocks, TD bank stocks appear to perform well. Keep in mind that some metrics like the Dividend Payout Ratio and Dividend Yield should not be too high.

High numbers in metrics like those can mean that the company’s dividend payouts are unsustainable, even more so if they are way above average.

TD stock’s P/E ratio is higher than the industry average. This means that the stock price may fall in the future, and it is priced relatively high. Some analysts estimate that TD’s stock should have a P/E ratio of 11.7x. TD bank stock appears to be somewhat overvalued in this metric.

As far as loan-to-deposit ratio goes, TD Bank’s LDR is at 73%, which is low. This can be considered safe and close to the ideal ratio.

Should I buy TD bank stock?

Conservative investors with a long-time horizon for their investment goals should find TD bank stock a good investment. Those looking for a stock that provides some liquidity for their portfolio would be pleased with TD’s regular and high dividend yield.

While Wealth Professional considers TD bank stock as among the best-performing bank stocks in Canada, do not discount the other options on the list that may be slightly more lucrative.

In general, TD bank stocks make for a wise investment. It trades at a reasonable stock price of $81.92 per share, relative to its high dividend yield. Also, analysts predict that the market will improve, and interest rates will fall in the second half of 2024.

With the market bouncing back by then, TD bank stock is expected to continue to grow and yield higher earnings at an accelerated pace.

This video shows a comparison of TD’s stock to the other banks that make up the Big Five. TD in terms of market cap is just behind Royal Bank of Canada (RBC), the largest company in those terms. The video concludes that due to its reliable dividend yield and overall stability, TD is a good long-term stock investment:

When it comes to investing in bank stocks, take a good look at key performance indicators like P/E ratio, dividend yield, dividends, and P/B ratio. You can do due diligence and research by consulting reputable industry sources like Wealth Professional. Sign up for our free daily newsletter for reliable, industry-leading information on TD bank stocks and other investment tools.